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Multiemployer defined benefit pension plans face the problem of underfunding. Will there be enough money to pay pensioners the benefits they’ve been promised? Such pension funds are insured through the Pension Benefit Guaranty Corporation, but only minimally.

In the 1970’s Congress enacted ERISA and made union employers quasi-insurers of the continued viability of defined benefit pension plans by imposing withdrawal liability on employers who would quit a union and withdraw from multiemployer pension plans that are underfunded. Those withdrawing employers must pay sums calculated to represent their proportional share of the current sums necessary to make good on future pension promises, that is, their estimated share of the shortfall.

Part of the impetus for enacting ERISA was to shore up private pension plans and help prevent a potential death spiral for plans that might lose contributing employers at an accelerating pace, leaving remaining employers to go down with a sinking ship. But however beneficial this private rescue of pension plans by union employers might have seemed at first blush, it raised issues of fairness and had several unintended consequences. The fix was unfair because it did not cause costs to be borne by actors responsible for the underfunding. Underfunding’s causes are many and complex but underfunding often results from errors of judgment by actuaries, investors and trustees. Too often, however, employers whose conduct was blameless, who faithfully paid required contributions to pension funds for years, would find themselves saddled with liability caused by others. The more underfunded (and mismanaged?) a multiemployer pension fund, the harder it may be for an employer to extricate itself and quit the fund. And the most loyal employers who stuck it out and stayed in the union the longest were often the biggest losers as their competitors who first bolted the union often came out ahead.

The law could be unduly harsh on employers in other ways too. As originally passed, ERISA limited liability for underfunding to 30% of an employer’s net worth. In 1980 Congress removed that liability cap with the Multiemployer Pension Plan Amendments Act to ERISA. Since then all employer assets are subject to takeover by underfunded pension funds. All of this must have been difficult for employers to anticipate in the 1950’s and 60’s when many collective bargaining agreements were first entered. Union employers have been made, in effect, insurers of some bad deals – on an ex post facto basis. And Congress also authorized underfunded pension funds to reach an employer’s unrelated business interests through imposition of control group liability, by which all businesses controlled by an owner and spouse are subject to seizure to satisfy the underfunding. These changes to national labor policy have left a lasting impression on union businesses. Even the most committed union employers have lost faith in federal labor and pension law to ensure their fair treatment.

An unintended consequence of such policies has been to likely accelerate the pace of the decline of unions, and, possibly, to widen the gap between the numbers of persons with defined benefit pensions and those not entitled to such benefits. There are political consequences to this, and a political solution may be necessary. (David Blitzstein, Multiemployer Pension Plans In Crisis: Troubled Plans Need Public Resources To Survive, FORBES, January 11, 2017.) It makes sense that resentments may arise among the growing numbers of younger workers who are not entitled to such benefits. And it is difficult to explain to a millennial why he should approve a political solution to shore up the pensions of earlier generations when that millennial and his cohort are unlikely to ever have a defined benefit pension.

A promise of a defined benefit pension decades into the future is always speculative and depends on many unknown variables. It seems obvious that such promises may, in some cases, have to be recalibrated. In addition to more recent changes to the law allowing for benefits to be reduced in some cases, an obvious answer to this problem is to convert defined benefit plans to defined contribution plans.

(*Del A. Szura is a member of Szura & Delonis, PLC. This post is intended for general information and educational purposes and should not be construed as legal advice. All Rights Reserved. Copyright 2017.)

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